28 June 2015

"Dude," did you see how the gays just like, organized and got same-sex marriage legal, like, everywhere?"
Dude exhales. Giggles. "Yeah."
"We should, like, totally do that for weed."
Inhales. Long seconds pass. Exhales. Stares into space. "Yeah. That would be so cool."

Marijuana legalization has lagged same-sex marriage legalization for some reason, but both are trending upwards. Social norms are changing. And the rate at which they are changing is accelerating.

Friday, the Supreme Court made same-sex marriage legal throughout the United States. While Massachusetts was the first state to make it legal, it is worth remembering that San Francisco was the first government within the US to legalize same-sex marriage. San Francisco has also led the nation in entrepreneurship. Social innovation shows up as both entrepreneurship and as new norms and laws.

One of the most central drivers behind progress is social invention. We all know that the steam engine was central to the emergence of an industrial economy. People are less likely to realize that the emergence of the stock market and modern bank were just as important. The steam engine is an example of a technological invention. The stock market is an example of a social invention. The first lets parts do what they could not do before, resulting in new or different products. The second lets people do what they could not do before, resulting in new or different institutions.

During the last century, people have become more open to change. We expect technological invention and the parade of new products it brings. This chart from Pew shows how the time it takes for us to adopt new products has accelerated. It took 35 years for the telephone to be adopted by one-quarter of us, but only 13 years for the mobile phone. And the rate at which adoption is accelerating is accelerating. The PC took 16 years to be adopted by one-quarter of us, and once we had it took just 7 years for one-quarter of us to get online. We adopted the internet twice as fast as we adopted computers and four times as fast as we adopted radio.

This matter of accelerating adoption rates matters to anyone predicting social change. We don't just adopt new technologies. We adopt new norms. And, just like with technology, the rate at which we're adopting new norms is accelerating.

In no small part because what starts out as technological innovation becomes social innovation. The automobile drove the creation of the suburbs. Radio and TV drove mass consumption. The computer drove online trading. New products lead to new behaviors. As we become more accepting of new products, we become more open to new norms.

The rapidity of change in product adoption is echoed in a change in social norms. The rise in acceptance of same-sex marriage in the last 20 years has been remarkable. It has more than doubled since 1996, in less than 20 years.

A shift in product adoption can make or break companies. A shift in the adoption of norms can make or break political parties.

The Whig Party died in the US when Republican Abraham Lincoln passed the Emancipation Proclamation. The shift in norms from slavery being legal to being illegal was a greater shift than this week's legalization of same-sex marriage, and it took out a party when it hit. The Republicans continued to lead into the next century. Along with progressives like former-Republican Teddy Roosevelt, Republicans helped to legalize women's vote.

But of course now, Republicans aren't thought of as disruptive social innovators. Instead, they are associated with resisting new social norms. They are the political equivalent of the ones who don't have a phone in the 1960s or don't have a computer in 2000. They don't lead the adoption of new social norms. They resist it.

Anyone who points to the fact that Republicans still have good numbers in most states needs to remember how quickly markets for products and political ideas can reach a tipping point and shift. Until the Republicans re-brand themselves as social innovators, they risk becoming the Whig Party of the 21st century.

25 June 2015

One popular theory about the stock market is that its
movement is random. This theory states that today’s prices reflect everything
we now know. Only new information changes today’s prices. We don’t know if the
new information will be good news or bad so we don’t know if prices are about
to go up or down.

Maybe, though, there is a different explanation for stock
movement.

Consider the possibility that the stock market is a place
where - paradoxically – lessons are only beneficial up until the time they are
learned. Once lessons are learned, they no longer apply.

That’s probably confusing but bear with me.

What happens during a bull market? First, a few investors
who have purchased stocks after the bust experience great gains. Other people soon
learn that you can miss out on big returns by not buying stocks, so they start
to buy. Eventually, many people have bought stock.

Lesson that drives people’s behavior during a bull market?

If
you buy stocks, you will make a lot of money.

What happens during a bear market? First, many investors who
bought stocks at the peak lose a lot of money. Other people learn that stocks
are a dangerous investment and best avoided.

Lesson that drives people’s behavior during a bear market?

If
you buy stocks, you can lose a lot of money.

It is only once the lesson is learned that it no longer
applies. Once people learn to be cautious, there is no reason to be cautious. Once people see the benefit of risk, it is
best to avoid risk. (Think about the 2008 financial crisis.)

It’s not that today’s information is reflected in today’s
stock prices. If that were true, new information would change prices only
incrementally and stock markets would not be so volatile. Instead, today’s
prices reflect yesterday’s lessons learned. For a while. Once this lesson has
spread to a critical mass of investors, though, it becomes obsolete. We reach a tipping
point and at that point the lesson no longer applies.

This paradox of learning is not just a collective issue. It
applies to individuals.

About 15 years ago, I bought a stock that I knew was
high-risk and high-return. I thought that it had enormous potential but also
knew it was really vulnerable. I told the kids that we would take a vacation on
its value in a year. If it fell in value, we'd go camping for a weekend, If it took off like
I thought it could, we would spend weeks in Europe. Well, it doubled. Then tripled. And
then collapsed. The company went bankrupt and the value of my stock was not
halved or reduced by 90%. It was zero.

Later, when I bought another stock that I thought had
tremendous - but uncertain - potential, I used the lesson I'd learned.
The stock doubled. Then tripled. At that point, I cashed out my initial
investment AND the amount by which it had doubled, leaving me with just a third
of the shares I had initially purchased. Pretty smart, right? As of today,
though, that stock is up 15,585% from when I bought it and its management has
announced that it will soon do a 7 for 1 split for this stock. (Yes. This is
Netflix.) The lesson I learned from the earlier stock didn't apply to the next stock.
Or more accurately, once the lesson was learned and changed my behavior, it was
no longer a good lesson.

I’ve learned other lessons. I waited for Google’s seemingly
inflated stock price to fall after the hype around its IPO in 2004. It rose
steadily after its IPO and has never returned to that initial price
since. I missed out on that ride by refusing to pay what I thought was a
temporary blip in price.

So I learned the lesson that when a stock goes
public with great potential it will open high and the keep rising just in time to apply it
to a stock that opened high and then fell. Because of the lesson learned from Google, I plugged my nose and bought Lending Club at what seemed like a high price. Lending Club fell about a third from that initial, inflated price. Presumably other people had learned the lesson from IPOs like Google,
a lesson that didn’t apply once people used it as a basis for paying what
seemed like too much.

The next time I then decided to wait for the hype to fade, the high initial price of the IPO just kept climbing, rising 25% before I finally bought it.

You might argue that stock movements are random and you
might be right. But it might also be that the stock market is one place that
punishes learning by changing in response to what we've learned the instant we've learned it.

You might even say that the real lesson learned is to do exactly the opposite of what worked last time but beyond the obvious problems (how do you actually define the last time? What is the opposite?), to the extent that this is actually learned, it will already be reflected in today's price and no longer be an applicable lesson.

It is only the lessons not yet learned that work, which may be one reason that hedge fund managers like Jim Simons at Renaissance Technologies Hedge Fund have done so well by creating algorithms that detect patterns too subtle for us to learn. Even Simons couldn't explain why his algorithms found the relationships it did: he only knew these relationships (e.g., the link between yesterday's hog bellies price and tomorrow's value of the yuan) existed. Simons personally made $6 billion in income in just a few years using algorithms that broke the code on these obscure relationships that - apparently - he could never articulate in simple English. Why? Because in the stock market, it is only what hasn't yet been learned that is worth knowing.

What we know about medicine now is incomplete but it is based on studies. I have worked with drug companies and while they are interested in profits, the people in these companies really do want to create products that improve lives. And they can't just make up data. After a variety of animal and human studies, they have to prove the efficacy of their drug over a three year window. It is not enough to have a story or two to illustrate this. They need data. From a lot of people.

The standard of proof for FDA studies is high. The guy selling bee pollen for your cold is telling you a story. It may well be that bee pollen shortens colds by 3 days for 80% of the people who take it. There are no studies to prove that. Instead, the guy selling this product tells you a story. It's not scientific but it is appealing. No dangerous side effects. All natural. And it'll cure you.

It's a beautiful thing that people can buy bee pollen even though it hasn't met with FDA approval as a remedy for colds. But of course bee pollen isn't covered by medicare. Unless you are talking about boycotting vaccines and thus putting the population around you at risk, your medical choices are individual choices. Popular opinion is not binding on medical experts.

Which brings me to economic policy.

In a modern democracy, economic policy is ultimately the product of popular opinion. Sort of. Voters respond to candidates' stories and either vote for them or not. The candidates who get in are the ones who help to shape economic policy. And while doctors don't shape their advice to align with popular misconceptions; politicians who hope to get elected must.

And this is the problem. "Bee pollen," is easier to understand than, "based on the protocol defined by our doctors in conjunction with our institutional advisory boards, we saw an improvement of 53% of the people in our clinical study, as opposed to an improvement in 28% who took the placebo ..."

When it comes to economic policy, "we should run the government like a household," is easier to understand than, "the multiplier for government spending during a recession is somewhere between 0.9 and 1.7."

It's a wonderful thing that we have a democracy. It does mean, though, that we're subject to herbal economics, home remedies that make for appealing stories even in the absence of actual studies.

15 June 2015

Jeb Bush officially announced today that he's running for president. It's a crowded field in the Republican primary so to save you from embarrassment, here is a simple guide to telling Jeb Bush and Jed Clampett apart.

10 June 2015

R. Luke Dubois has created a fascinating way to see which words the presidents used most frequently in their state of the union addresses here. It's like candy for a political nerd like me.

Ronald Reagan's Most Frequently Used Words in SOTU

Here is a list of (some of) the presidents most commonly used word (or in some cases, top two or three). It is like a single word tweet for the defining issue of their time, a fascinatingly succinct way to review the history of centuries and the focus of their administration.

George Washington: Gentlemen (a lovely bit of civility to a group of rebels who'd just defeated the world's greatest empire)

Madison: Enemy (the battle of 1812 took place during his presidency, the only time the White House was occupied by enemy soldiers)

James Monroe: Parties (the emergence of political parties had become a new reality for the young country)

Andrew Jackson: Bank (Jackson dissolved the Central Bank and it would be decades before the Federal Reserve would replace it)

Tyler: Texas (added to the nation during his term)

Polk: Oregon, California (soon after his term these became new states)

Taylor: Empire (apparently this process of adding territories like Oregon and California got a little intoxicating)

Buchanan: Slavery (an issue that would drive the country to civil war soon after he left office)

Lincoln: Emancipation (an issue resolved - sort of)

US Grant: Products, education (emergence of mass manufacturing and need for better education for new economy)

Rutherford Hayes: Coinage, dollar (debates about how to increase supply of money to match the increased supply of products)

Arthur: Merchandise (trying to sell the products to people with coins and dollars)

Harrison: Wages (emergence of jobs and the popularization of working for other people rather than working as independent farmers and artisans)

Teddy Roosevelt: Corporations (the newly dominant and powerful institution at the dawn of the 20th century), Railroads, Wage

Hoover: Unemployment (the Great Recession hits)

FDR: Democratic, Unity, Allies (We are all in this together, from WWII to economic recovery)

Truman: Soviet (now that the Nazis are gone,this is our new threat)

Eisenhower: Nuclear (and in case you were unclear about it, this is specifically how they threaten us in this new Cold War)

LBJ: Vietnam (where the US lost its first war and where Johnson lost his presidency)

Nixon: Truly (truly ironic given his own tapes revealed the depth of his deceit), Environment (this is the man who signed the EPA into law)

Ford: Barrels, crude, gas (from the year before he took to the year he left office, oil prices more than doubled - which raised inflation and unemployment)

Innovation and entrepreneurship are closely related but you
can make a big mistake by thinking that they are the same thing. They are not.

Innovation results in a new technology or product. It is
technological invention, which lets parts do what they could not previously do.
You have an engine and wheels and axles and you put them together to invent a
car. Progress depends on innovation and great innovators can get rich.

Entrepreneurship, by contrast, results in a new company or
organization. It is social invention, which lets people do what they could not
previously do. You have people with more money than they need now and people
who need money and put them together to make and get loans and you have a bank.

Progress depends on entrepreneurship and great entrepreneurs get even richer
than great innovators.

Henry Ford

Ray Kroc didn’t invent the hamburger but when he died he was
worth half a billion dollars. He was an entrepreneur. Sam Walton didn’t invent
the retail store but his heirs are worth more than $100 billion. He was an
entrepreneur. Henry Ford didn’t invent the car but he when he died in 1947, he
was worth nearly $200 billion (inflation adjusted). He, too, was an entrepreneur.

Sam Walton

Given the way we use the term, all of these entrepreneurs
were innovative. And indeed, it is hard to imagine an entrepreneur who wasn’t
innovative having much success. You have to distinguish your product or service
from competitors and that usually calls for innovation.

But thinking that your job as an entrepreneur is the same as
the job of an innovator can create unnecessary confusion and failure.

Imagine two people with equal skills for creating companies
and software. One – Seo-joon - thinks of himself as an innovator and focuses on
creating a great app. The other – Emma - thinks of herself as an entrepreneur
and focuses on creating a great company.

Seo-joon uses his scarce attention to analyze the market,
software tools, and to code. He does a great job and creates a valuable app.

Emma uses her scarce attention to analyze markets, business
plans and processes, and to create a company where people who want to focus on
creating and selling great products will want to work. She does a great job and
creates a valuable company.

When Seo-joon completes his great app, his work has just
begun. He will need a way to distribute the app, to market and sell it. He will
need to find a way to support it as customers begin to use it and either
encounter bugs or simply have questions. He will need to do research on how the
product is being used to decide how to improve the product and to find new
markets for it. He will need to set up payroll, finance, HR, and a host of
other business processes to support his app.

What is likely to happen? Probably, after realizing how much
more work he has to do – work he has not even focused on understanding or
learning – he will sell his product to Emma who will either buy it outright or
offer him royalty payments. Emma has engaged in entrepreneurship and has built
a company. Seo-joon’s app is just one of her products. She has a portfolio of
products. Emma is actually in a position to create more value with this
portfolio of products – even though she may not have designed or created a
single one – than Seo-joon is with his great app.

The world needs both innovators and entrepreneurs. R&D
labs, though, are full of innovators who work for entrepreneurs or someone who
manages a company founded by an entrepreneur.

Decide if you are building a company or a product. Decide,
that is, whether you are an innovator or entrepreneur. If you try innovation
without a way to sell and support your product, you’ll likely flounder. If you
try entrepreneurship without some innovative approach or with partnerships with
innovators, you’ll likely flounder. Be clear about what you are doing and then
try to excel at that. Great innovators and entrepreneurs tend prosper; people
who divide their attention between both of these important tasks tend to be
either unlucky or superhuman.

07 June 2015

Today's NY Times has an article about Hillary Clinton's probable strategy, written by Jonathon Martin and Maggie Haberman. Bill Clinton went after (and won) states like Kentucky whereas Barack Obama focused on fewer states with an agenda that had less broad-based appeal. It seems that Hillary will be more like Obama in this regards, focusing on rallying more liberal voters rather than appealing to more moderate swing voters. The fear is that Democrats in the neglected states will be less likely to win local elections and even the ones who do win a place in Congress are going to be less able to relate to the folks across the aisle. Which is to say, it could cause more gridlock, not less.

The quote that summarizes the thinking behind Hillary Clinton's strategy is here:

“The highest-premium voter in ’92 was a voter who would vote for one party some and for another party some,” said James Carville, Mr. Clinton’s chief strategist in 1992. “Now the highest-premium voter is somebody with a high probability to vote for you and low probability to turn out. That’s the golden list. And that’s a humongous change in basic strategic doctrine.”

The real question is whether this is a capitulation to the reality of a more polarized electorate or if it is just going to exacerbate this polarization. In either case, it seems like a reminder that Hillary is more pragmatic than idealistic, less about changing voters's minds than winning office.

05 June 2015

With the exception of Rand Paul, the 10 to 17 Republican candidates running for the White House all say they would not have invaded Iraq but do say they're eager to attack Iran. Lindsey Graham is probably the most extreme example of what is fairly normal within the GOP: warning about a world set to explode into chaos, militants who hate our way of life.
This is perplexing. Deaths from warfare have been steadily and significantly dropping throughout the last 70 years.

The violent crime rate has fallen in 8 of the last 10 years. And yet, in 10 of the last 10 years, the majority of Americans thought that violent crime rates were going up. A great many people do perceive the world as getting worse, not better.

I think there are a variety of reasons why negativity is such a positive for politicians - particularly for Republican politicians.

For one thing, the belief in progress is still a fairly novel thing. Until about 1500 to 1700, most people believed that the Garden of Eden was a paradise from which we'd fallen. Life had not gotten better since Adam and Eve but had, instead, only gotten worse. If there was any hope for freedom from grief it was not to be found in this life. The Renaissance wounded this concept and the Enlightenment dealt it a death blow. Well, for some people. There are still many people who have a visceral conviction that things will get worse in the future or even believe that things are getting worse now. Some, not all, of these people are religious and still believe in the fall from grace. And, of course, religious conservatives are more likely to vote Republican.

And of course pessimists are right at some level. I have found that my own view of myself lags reality by at least a decade. I'm surprised by recent pictures of me that show me as much older than I remember. My father died about a year and a half ago and I have no illusions about what the end of life will be like. I'll become less able and, in the words of Bruce Springsteen, "unrecognizable to myself," and I'll eventually die. It's hard to take comfort in the fact that life could be better for the average 30 year old in 30 years if I'm dying or dead then. When you reach a certain age, it becomes harder to be optimistic about the future. And of course, the elderly are more likely to vote Republican. A message of optimism directed at them seems to ring false.

There is one other factor that might explain why the message of military might and threats of violence so resonate with certain voters. It has to do with the source of wealth.

When land is the basis of wealth, it is worth fighting. If you win, you keep your land or even get more. If you lose, you wander without home or income.

When knowledge work is the basis of wealth, you do better to collaborate than fight. In Harari's Sapiens: A Brief History of Mankind, he makes the point that in 1849, during the California gold rush, it would actually pay off to attack California. If you conquer it, the mines are yours. You get the wealth. By contrast, if you were to conquer Silicon Valley today, killing people as you invaded, you would end up with nothing. Silicon Valley's assets are in people's minds and it is tough to seize those with tanks and planes.

Rural areas tend to be more Republican. For these people, their wealth is often rooted in farmland or oil wells or businesses that support them. In urban areas, we have knowledge work as the basis of wealth. People who base their wealth on land are more threatened by the thought of war. It actually makes sense to seize a farm or oil well. People in cubicles are more likely to be baffled by the threat. It doesn't really even register as plausible.

So when candidates talk about the threat of radical Islam, it resonates with religious farmers and oil men who see war as a credible way to gain wealth and persecute true believers. By contrast, neither of those buttons work for most urban knowledge workers. And if you talk about how things are getting worse to people in their 80s, people for whom life really is getting worse, it resonates in ways it simply can't with young people still in the prime of their life. Unsurprisingly, Republicans preach fear to their base of rural, religious, older citizens. Fortunately for the world - unfortunately for Republicans - this base is shrinking.

04 June 2015

Today Rick Perry announced he is running for president. As the field of dubious candidates grows, it is a reminder that not every child should be told he can grow up to be president.

Rick strolled out into the crowd of supporters to this song, which apparently will be his campaign song. It's sort of country, sort of rap so it's obviously been carefully crafted to appeal to a broad segment of voters. Here are the lyrics:

03 June 2015

I remember a conversation with a man who grew up in the Soviet Union. This was a time when the Soviets had the best chess players and a military-science program that rivaled our own, in spite of their having a smaller economy. The real problem in the USSR was not the quality of education, he said. That was as rigorous as education anywhere. The problem was, there was no capital. If you are a wizard at chemistry but don't have a lab to work in, it is tough to translate your knowledge into value.

Russian programmers are among the most valued on Wall Street. Apparently their code is more elegant and runs more quickly. The reason for this is that they didn't learn programmer with unlimited time on the computer. They had to write out their programs on paper before sitting down to the computer in order to complete programs in the limited time they had.

The problem in the Soviet Union and now Russia was and is access to capital. Without sufficient capital, it is hard to make real gains from education. Chemistry without labs or computer science without computers is more of an intellectual exercise than a boost to the economy.

In the 50 years from 1960 to 2010, the global labor force’s average time in school essentially tripled, from 2.8 years to 8.3 years. This means that the average worker in a median country went from less than half a primary education to more than half a high school education.How much richer should these countries have expected to become? In 1965, France had a labor force that averaged less than five years of schooling and a per capita income of $14,000 (at 2005 prices). In 2010, countries with a similar level of education had a per capita income of less than $1,000.In 1960, countries with an education level of 8.3 years of schooling were 5.5 times richer than those with 2.8 year of schooling. By contrast, countries that had increased their education from 2.8 years of schooling in 1960 to 8.3 years of schooling in 2010 were only 167% richer.

In the Fourth Economy, I argue that capital is a limit to economic progress before knowledge work is. Why? In the simplest example, if you still have to shovel coal by hand, it doesn't matter that you know engineering principles for designing a steam shovel. Your productivity will be a product of your back muscles, not your design insights. At one point of development, capital is clearly the limit to progress. You need machines that can do the work of people doing manual work. After this point is reached, knowledge work becomes the new limit. Once workers can drop their shovels, they can begin to create value through knowledge work that results in a redesign of the steam shovel or even re-think the source of energy.

Oddly, education can offer diminished value at two stages of economic development. When a country still hasn't got the computers or labs for its computer science and chemistry majors to work in. That is, when a country still faces the limit of capital. Or when a country has moved beyond the limit of knowledge work and now faces the limit of entrepreneurship. Countries like Tunisia find themselves in the first category. Countries like the US find themselves in the second. And yet, as Hausmann points out, education is held up as a panacea for economic progress.

Education and capital have been offered as solutions to economic stagnation for a good reason. They've been at the heart of massive gains in productivity and GDP. Kneading and baking dough has also been at the heart of great bread but it has to be done in the right order.